Distance and Trade: Disentangling Unfamiliarity Effects and Transport Cost Effects

Posted: 26 Jun 2009

See all articles by Rocco Huang

Rocco Huang

Michigan State University - Department of Finance; Wharton Financial Institutions Center

Date Written: February 24, 2006

Abstract

This paper provides evidence supporting Grossman(1996)’s claim that not only transport costs but also unfamiliarity can explain the negative correlation between geographic distances and bilateral trade volumes. A gravity model that controls for as many natural causes of trade as possible reveals that countries high in uncertainty-aversion (based on Hofstede’s survey) export disproportionately less to distant countries (with which they are presumably less familiar). More important, this result is mainly driven by differentiated products, not by products with international organized exchanges or with reference prices. For transport costs alone to explain such a trade pattern, one would have to assume that distance-related ad valorem transport costs are higher when a trade route originates from a high uncertainty-aversion country, which is unlikely. This trade pattern is easy to explain, however, if one accepts that geographic distance is a proxy for unfamiliarity and that exporters in high uncertainty-aversion countries are more sensitive to informational ambiguity. A further result is that high uncertainty-aversion countries trade less and thus grow poorer in the long run, which suggests that cultural factors are as important as geographic ones in determining trade openness and prosperity.

Keywords: International trade, gravity model, uncertainty aversion

JEL Classification: F15, Z13, F43

Suggested Citation

Huang, Rocco, Distance and Trade: Disentangling Unfamiliarity Effects and Transport Cost Effects (February 24, 2006). European Economic Review, Vol. 51, No. 1, 2007. Available at SSRN: https://ssrn.com/abstract=1425903

Rocco Huang (Contact Author)

Michigan State University - Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

HOME PAGE: http://www.roccohuang.com

Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

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