TY  - JOUR
AU  - Feyrer,James
TI  - Distance, Trade, and Income – The 1967 to 1975 Closing of the Suez Canal as a Natural Experiment
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15557
PY  - 2009
Y2  - December 2009
UR  - http://www.nber.org/papers/w15557
L1  - http://www.nber.org/papers/w15557.pdf
N1  - Author contact info:
James Feyrer
Department of Economics
Dartmouth College
6106 Rockefeller Hall
Hanover, NH 03755-3514
Tel: 603/646-2533
Fax: 603/646-2122
E-Mail: james.feyrer@dartmouth.edu
AB  - 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.
ER  -