Trade Booms, Trade Busts, and Trade Costs
What has driven trade booms and trade busts in the past and present? We derive a micro-founded measure of trade frictions from leading trade theories and use it to gauge the importance of bilateral trade costs in determining international trade flows. We construct a new balanced sample of bilateral trade flows for 130 country pairs across the Americas, Asia, Europe, and Oceania for the period from 1870 to 2000 and demonstrate an overriding role for declining trade costs in the pre-World War I trade boom. In contrast, for the post-World War II trade boom we identify changes in output as the dominant force. Finally, the entirety of the interwar trade bust is explained by increases in trade costs.
We thank Alan M. Taylor for comments and Vicente Pinilla and Javier Silvestre for help with our data. We also appreciate the feedback from seminars at Calgary, Essex, Michigan, the New York Federal Reserve, Oxford, Stanford, Stockholm, UCLA, Valencia, and Zaragoza as well as from presentations at the 2008 Canadian Network for Economic History meetings, 2008 Western Economics Association meetings, the 2008 World Congress of Cliometrics meetings, and the 2009 Nottingham GEP Trade Costs Conference. Finally, Jacks gratefully acknowledges the Social Sciences and Humanities Research Council of Canada for research support. Novy gratefully acknowledges research support from the Economic and Social Research Council, grant RES-000-22-3112. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.