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Distance and Trade: Disentangling unfamiliarity effects and transport cost effects

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Author Info
Rocco Huang (The World Bank & The University of Amsterdam)
Abstract

This paper provides evidence supporting Grossman’s (1996) claim that not only transport costs but also unfamiliarity can explain the negative correlation between geographic distances and bilateral trade volumes. A gravity model that controls for as many natural causes of trade as possible reveals that countries high in uncertainty-aversion (based on Hofstede’s survey) export disproportionately less to distant countries (with which they are presumably less familiar). More important, this result is mainly driven by differentiated products, not by products with international organized exchanges or with reference prices. For transport costs alone to explain such a trade pattern, one would have to assume that distance-related ad valorem transport costs are higher when a trade route originates from a high uncertainty-aversion country, which is unlikely. This trade pattern is easy to explain, however, if one accepts that geographic distance is a proxy for unfamiliarity and that exporters in high uncertainty-aversion countries are more sensitive to informational ambiguity. A further result is that high uncertainty- aversion countries trade less and thus grow more slowly in the long run, which suggests that cultural factors are as important as geographic ones in determining trade openness.

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Paper provided by EconWPA in its series International Trade with number 0511010.

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Length: 34 pages
Date of creation: 12 Nov 2005
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Handle: RePEc:wpa:wuwpit:0511010

Note: Type of Document - pdf; pages: 34
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Web page: http://129.3.20.41

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Find related papers by JEL classification:
F1 - International Economics - - Trade
F2 - International Economics - - International Factor Movements and International Business

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  1. Raman Uppal & Tan Wang, 2003. "Model Misspecification and Underdiversification," Journal of Finance, American Finance Association, vol. 58(6), pages 2465-2486, December. [Downloadable!] (restricted)
  2. Jeffrey A. Frankel & David Romer, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June. [Downloadable!] (restricted)
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This page was last updated on 2008-7-21.


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