Breaking Away from Icebreakers: The Effect of Melting Distances on Trade and Welfare

This article assesses the effect of the opening of Arctic shipping routes on world trade patterns and welfare. We begin by computing shortest bilateral maritime distances with and without Arctic routes. Then, we predict trade flows by combining counterfactual distances with distance elasticities of trade estimated using historical episodes that also affected maritime distances. Our general equilibrium exercise extends beyond by using a structural gravity model that allows trade reallocation across country pairs. As a result, all country pairs are now affected by the opening of Arctic routes, including those for which bilateral distance remains unchanged. In our preferred estimation, world trade is predicted to increase by 0.32% and welfare by 0.02%. The positive effects concentrate in Europe and Northeast Asia, while minor losses affect countries in the Caribbean, West Africa, the Mediterranean and the Indian Ocean.