Geography, Search Frictions and Trade Costs

We build a framework that models the behavior of both exporters and transportation agents (ships); its spatial equilibrium determines world trade costs and flows. Our framework has the following three novel features: trade costs are endogenous and determined jointly with trade flows; trade costs depend on the entire network of trade linkages across countries; search frictions between exporters and ships can limit trade. The model features geography, forward-looking optimizing ships and exporters and search frictions. We estimate the model using a unique database on shipping contracts, global vessel movements from satellites and detailed sea weather data. Our empirical strategy allows us to obtain the main model primitives of interest (exporter valuations and exporting costs, ship costs), but also to measure the extent of search frictions. We flexibly recover both the matching function between exporters and ships, as well as the global distribution of exporters. We use the framework to revisit a number of questions. We show that world trade elasticities are lower if the ships' optimal reaction is accounted for. We consider China's super growth to show how shocks propagate through the network of countries. Finally, we quantify the loss due to search frictions.