Distance, Trade, and Income -- The 1967 to 1975 Closing of the Suez Canal as a Natural Experiment

By James D. Feyrer. 2009

267 citations recorded by the source corpus.

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.

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Citations in the corpus

Roads, exports and employment: Evidence from a developing country (2017, background): “3 There is also an incipient literature that looks at the impact of infrastructure across countries on economic outcomes (see, e.g., Feyrer 2009; Akerman, 2009 and Volpe Martincus et al., 2014).”
The Impact of Regional and Sectoral Productivity Changes on the U.S. Economy (2014, unknown): “For comparison, the states with the next two largest shares of employment in that sector were Texas and Massachusetts with 8% and 6% respectively, while most other states (37) had shares of employment in Computers and Electronics of less than 2%.”
The Tip of the Iceberg: A Quantitative Framework for Estimating Trade Costs (2015, result): “…Massachusetts Institute of Technology doi:10.1162/REST_a_00517 across markets.5 Empirical findings of the gains from trade (e.g., Pavcnik, 2002, and Feyrer, 2009) are often large compared to the relatively modest gains predicted by the class of models considered by Arkolakis, Costinot, and…”
Trade Theory with Numbers: Quantifying the Consequences of Globalization (2013, unknown): “Due to space constraints, we do not review reduced-form evidence on the gains from openness; see e.g. Frankel and Romer (1999), Feyrer (2009a), and Feyrer (2009b).”
The Gains from Market Integration (2015, methodology): “Feyrer (2009b) calculates the shortest route by air (assumed to be the geodesic distance) and by sea between each pair of countries in the world.”
The Impact of Trade on Inequality in Developing Countries (2017, unknown): “10See Feyrer (2009), Estevaderodal and Taylor (2013) for evidence that trade increases aggregate income and growth.”
Temporary Protection and Technology Adoption: Evidence from the Napoleonic Blockade (2014, methodology): “15In its identification strategy, the paper builds on Frankel and Romer (1999), Feyrer (2009a), Feyrer (2009b) and Pascali (2015)”
Openness and income: The roles of trade and migration (2014, background): “For an instance of convincing identification of the effects of distance on trade flows see Feyrer (2009b).”
The Wind of Change: Maritime Technology, Trade and Economic Development (2017, background): “More recently, Feyrer (2009a) and Feyrer (2009b) exploit two natural experiments: the closing of the Suez Canal between 1967 and 1975 and improvements in aircraft technology that generated asymmetric shocks in trade distances. Feyrer finds that an increase in trade exerts large positive e§ects on ec”