The Gravity of Intermediate Goods
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The Gravity of Intermediate Goods Paola Conconi1,2,3 · Glenn Magerman1,4 · Afrola Plaku1
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract One of the puzzles of the gravity literature is the persistent effect of distance on trade flows, despite the dramatic fall in trade costs during the last few decades (Disdier and Head in Rev Econ Stat 90(1):37–48, 2008). A possible reason for the “distance puzzle” is that trade in intermediate goods—which has risen dramatically during this period due to the emergence of global value chains—may be more sensitive to distance than trade in final goods. Using a dataset of bilateral import flows that covers 5000 products and more than 200 countries over the 1998–2011 period, we show that intermediate goods are indeed more sensitive to distance than are final goods and that differentiated inputs exhibit the highest distance elasticity. The results are robust to including different sets of controls, and using different samples and econometric methodologies. They suggest that sourcing inputs from nearby countries helps final good producers to coordinate with their suppliers, monitor their production, and ensure the timely delivery of inputs that need to be tailored to their needs. Keywords Distance · Final goods · Intermediate goods · Product differentiation JEL Classification F14 · F23
* Paola Conconi [email protected] Glenn Magerman [email protected] Afrola Plaku [email protected] 1
European Center for Advanced Research in Economics and Statistics (ECARES), Université Libre de Bruxelles, Avenue Franklin Roosevelt 42, 1050 Brussels, Belgium
2
CEPR, London, UK
3
CESifo, Munich, Germany
4
National Bank of Belgium, Brussels, Belgium
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1 Introduction During the last three decades, advances in information and communication technology and falling trade barriers have made it easier for firms to source key inputs from foreign suppliers and to fragment their production processes across countries. Research and development, design, production of parts, assembly, and marketing and branding—which were previously performed in close proximity and within the same firm—are increasingly fragmented across the globe and across firms. As a result of the emergence of global value chains (GVCs), trade in intermediate inputs now accounts for as much as two-thirds of international trade (Johnson and Noguera 2012). These trends have led some to announce the “death of distance” (Cairncross 1997) and to argue that “certainly it is an exaggeration to claim that moving goods is free, but it is becoming an increasingly apt assumption” (Glaeser and Kohlhase 2003). At the same time, the gravity literature of international trade has emphasized the persistent effect of distance on bilateral trade. In an influential meta-analysis study, Disdier and Head (2008) investigate the trends in the variation of 1467 distance estimates from 103 papers and provide systematic evidence that “the estimated negative impact of distance o
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