Defying Gravity: The Substitutability of Transportation in International Trade

What role do individual modes of transportation play in international trade? To study this question, I develop a model of international trade that incorporates a role for transportation and thus allows me to study mode-specific trade flows. I use a novel data set to estimate the complete model for a sample of 79 countries distinguishing air, sea, and surface transportation. The estimated model implies that surface transportation is mostly used for trade over short distances, whereas air and sea transportation dominate long-distance trade. Furthermore, the different modes of transportation display a high degree of substitutability. Using counterfactual analysis I show the implications for the roles played by the different modes of transportation. Long-distance modes are more important for poor countries because in order for them to realize gains from trade they need access to technologically advanced but far-away markets. Rich countries, on the other hand, can substitute long-distance trade more easily for trade with neighboring countries without changing the gains from trade much. As a consequence, reducing the estimated asymmetries in mode-specific trade costs for only one long-distance mode, either air or sea, can reduce income differences in the sample by about 35%.