The relative importance of distance in restricting international trade

Abstract

Based on a general setup, this article shows that distance consistently accounts for about 40% of the international trade costs over the years for both developed and developing countries if we assume that trade costs take the iceberg form. The result helps us have a clear perspective of the relative importance of distance in restricting international trade.

Keywords:

• gravity model
• international trade
• trade barriers
• trade costs

JEL Classification:

• F10
• F15

Notes

¹ The simple average of distance between country pairs in our sample is 4557.26 miles and only 1.91% of country pairs are within 375 miles.

² Waugh (2010) shows that problems of heteroskedasticity and zero trade flows are mitigated for the size-normalized gravity model.

³ The simple average of over years is 39.56% and the slope is –0.003.