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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. Souleymane COULIBALY & Lionel FONTAGNÉ, 2004. "South-South Trade: Geography Matters," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 04.07, Université de Lausanne, Faculté des HEC, DEEP.
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Cited by:
  1. Campbell, Douglas L., 2010. "History, culture, and trade: a dynamic gravity approach," MPRA Paper 24014, University Library of Munich, Germany.
  2. Nicholas Bloom & Paul Romer & Stephen Terry & John Van Reenen, 2014. "Trapped Factors and China's Impact on Global Growth," CEP Discussion Papers, Centre for Economic Performance, LSE dp1261, Centre for Economic Performance, LSE.
  3. 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.
  4. Raphael A. Auer, 2012. "Geography, Institutions, and the Making of Comparative Development," CESifo Working Paper Series 3874, CESifo Group Munich.
  5. Krautheim, Sebastian, 2012. "Heterogeneous firms, exporter networks and the effect of distance on international trade," Journal of International Economics, Elsevier, Elsevier, vol. 87(1), pages 27-35.
  6. Hosny Zoabi & Philip Saure, 2010. "Effects of Trade on Female Labor Force Participation," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c015_015, DEGIT, Dynamics, Economic Growth, and International Trade.
  7. Tim Besley & Thiemo Fetzer & Hannes Mueller, 2012. "One Kind of Lawlessness: Estimating the Welfare Cost of Somali Piracy," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 898.12, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  8. Lendle, Andreas & Olarreaga, Marcelo & Schropp, Simon & Vezina, Pierre-Louis, 2012. "There goes gravity : how eBay reduces trade costs," Policy Research Working Paper Series 6253, The World Bank.
  9. Luigi Pascali, 2014. "The Wind of Change: Maritime Technology, Trade and Economic Development," Working Papers 764, Barcelona Graduate School of Economics.
  10. 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.
  11. 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.
  12. Ariel Burstein & Javier Cravino, 2012. "Measured Aggregate Gains from International Trade," NBER Working Papers 17767, National Bureau of Economic Research, Inc.
  13. Ortega, Francesc & Peri, Giovanni, 2014. "Openness and income: The roles of trade and migration," Journal of International Economics, Elsevier, Elsevier, vol. 92(2), pages 231-251.
  14. William W. Olney, 2013. "Impact of Corruption on Firm Level Export Decisions," Department of Economics Working Papers, Department of Economics, Williams College 2013-04, Department of Economics, Williams College.
  15. Assaf Zimring, 2013. "Gains from Trade: Lessons from the Gaza Blockade 2007-2010," Discussion Papers, Stanford Institute for Economic Policy Research 12-024, Stanford Institute for Economic Policy Research.

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