Assessing the Global Impact of Transit Countries in a Gravity Model

Abstract

We study the global impact of rent extraction by countries that are in favorable locations to intermediate international trade. We propose a geography-based algorithm to measure land-sea distances and estimate a modified gravity trade model (1993-2016) which indicates that transit rents sharply lower trade. We use our model and simulations to gauge the welfare effects of transit rents. While transit countries benefit, general equilibrium price distortions impose substantial costs on all countries, interestingly also on those only indirectly affected (e.g. USA).

Keywords: border effects, distance measure, double marginalization, gravity, transit countries JEL: F12