Date of Award
December 2022
Degree Type
Dissertation
Degree Name
Doctor of Philosophy
Department
Economics
First Advisor
Antu Murshid
Committee Members
Vivian Lei, Filip Vesely, Jangsu Yoon, Tibor Besedes
Abstract
This dissertation examines the role of distance in bilateral trade relationships. The negative relationship between distance and bilateral trade volumes is one of the most robust patterns in data that economists can point to. There are several reasons why distance may matter for trade. Countries that are closer together may share a common language, common traditions, as well as a historical legacy of strong trading bonds. At the same time, distance impacts transportation costs. Transportation costs are higher for countries that are far apart and therefore the costs of engaging in trade are also high. Unfortunately, there has been little research that explains how much each of these factors matters for trade.This dissertation tries to understand the role of transportation costs in air-based trade. Although goods shipped by air only account for about one percent of total trade, they account for over a third of the total value of global trade flows. Hence focusing on air-based trade is not just of academic interest. Moreover, unlike trade by sea, air trade is costly; shipments by air can cost 10 to 15 times more per kg per mile to ship than sea-based alternatives. Hence transportation costs are likely to play an important role in aerial trade. At the same time, there have been huge reductions in costs in the aviation industry. These innovations are ongoing and therefore, looking forward, the evolution of transportation costs may be a key determinant in the future expansion of air-based trade. This research is presented across two chapters. The first chapter focusses on the measurement of distance. Typically, bilateral distances are measured as the great circle arc between two points. Those two points could be the capital cities in each country in the pair, or the two most populous cities, or some weighted average of distances between important cities. These measures do not provide a precise measure of actual distances travelled when shipping goods. In this research I measure actual flight distances travelled between two countries. This measure accounts for the aerial highway network along which planes fly. Since the density of the air highway network can be thin over certain areas, actual distances travelled can be significantly greater than great circle path connecting two points. In the second chapter, I study the effect from air transportation cost on international trade volume. This chapter utilizes a natural experiment in which flight distances can change over time to identify the role of transportation costs in trade. The change in flight distances happen when airspace restrictions are introduced in response to conflicts. These restrictions can add hundreds of miles to existing flight paths. The time variation in flight distances allows me to control for hard to measure fixed factors for each country pair that may be correlated with distance. These fixed factors could be common traditions, shared histories, common languages etc. The identifying assumption underlying this approach is that the change in distance over time affects only transportation costs. My results suggest that trade responds elastically to changes in transportation costs. Moreover, transportation costs are all or most of the reason why air-based trade is negatively related to distance.
Recommended Citation
Chu, Jing, "Essays on the Role of Distance in Bilateral Trade" (2022). Theses and Dissertations. 2987.
https://dc.uwm.edu/etd/2987