JOB MARKET PAPER

"Gravity and Globalization"

ABSTRACT

This paper presents a solution to the empirical puzzle of the persistent effect of distance on international trade. The main contribution of the paper is to show that globalization has an undetermined impact on the elasticity of distance. I argue that the process of globalization is a mix of the reduction of trade costs (distance and non-distance related) and the costs of decentralizing production. I show that a reduction in trade costs due to a reduction in transport costs unequivocally reduces the magnitude of the distance elasticity. In contrast, a reduction in the portion of trade costs unrelated to distance (e.g. tariffs or communication costs), can either increase or decrease the magnitude of the distance elasticity. This result comes from the fact that a reduction in trade costs always fosters trade, but at the same time, when distance unrelated costs change, the relative composition of trade costs changes too. I also show that a reduction of the costs pertaining to decentralizing production increases the magnitude of the distance elasticity in countries that are technologically more developed, while the opposite effect occurs for less technologically developed countries. Finally, I provide empirical evidence in favor of these results. Economically, only the changes in the composition of trade costs reveals to be important in explaining the evolution of the distance elasticity over time.