On the Geography of Trade: Distance is Alive and Well

It has been widely argued that, with the decline in trade costs, the importance of distance has declined over time. On the other hand, most gravity models find that the importance of distance has increased over time. This puzzle has not been satisfactorily explained and is examined here. The paper develops a new measure of the distance of trade (DOT) and shows that the DOT falls over the period 1962-2000 for the average country in the world, with the number of countries with declining DOT about double those with increasing DOT. This implies an increased importance of distance over time. The paper shows how this can be true despite declining trade costs. The paper also analyzes the impact on the DOT of changes in production, customs and domestic transport costs, in real exchange rates and in competition. Finally, the paper provides an empirical analysis of the evolution of the DOT and explains most of its negative trend.