Competition and the distance puzzle

Abstract

This thesis aims to investigate the empirical relevance of the impact of sectoral competition on the increasing negative impact of geographic distance on international trade flows vis-a-vis the secular decline in the transportation and communication costs, which is known as the distance puzzle. Using disaggregated trade data, I find that as the international markets become more competitive; bilateral trade becomes more elastic to distance. My analysis reveal that increasing competition explains 20% of changes in the distance elasticity of trade between 1976 and 2016. I examine alternative hypothesis to explain the rising distance effect. My results imply that declining average tariff rates reduce the importance of distance on trade. I find that goods with increasing elasticity of substitution are likely to be more distance elastic over time. I also find that differentiated products are less distance sensitive compared to homogenous goods.