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7 - Trade costs, market access, and economic geography
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- By E. M. Bosker, University of Groningen, Netherlands, H. Garretsen, University of Groningen, Netherlands
- Edited by Peter A. G. van Bergeijk, Steven Brakman, Rijksuniversiteit Groningen, The Netherlands
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- Book:
- The Gravity Model in International Trade
- Published online:
- 01 June 2011
- Print publication:
- 10 June 2010, pp 193-223
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Summary
Introduction
Trade or transport costs are a key element of new economic geography (NEG) models in determining the spatial distribution of economic activity (see e.g. Krugman 1991; Venables 1996 and Puga 1999). Without trade costs there is no role for geography in NEG models. It is therefore not surprising that trade costs are also an important ingredient of empirical studies in NEG (see Redding and Venables 2004; Hanson 2005 or Head and Mayer 2004). They are a vital ingredient of a region's or country's (real) market potential, which measures the ease of access to other markets (Redding and Venables 2004; Head and Mayer 2006). In the empirical trade literature at large, trade costs are also a main determinant of the volume of trade between countries (see e.g. Limao and Venables 2001; Anderson and van Wincoop 2004).
The empirical specification of trade costs is, however, far from straightforward. Problems with the measurement of trade costs arise because between any pair of countries they are very hard to quantify. Trade costs most likely consist of various sub-components that potentially interact, overlap, and/or supplement each other. Obvious candidates are transport costs, tariffs, and non-tariff barriers (NTBs), but also less tangible costs arising from cross-border trade, due to institutional and language differences for example, have been incorporated in previous studies (Limao and Venables 2001). An additional difficulty arises with what is arguably the most obvious measure of trade costs, transport costs.
11 - Economic and financial integration and the rise of cross-border M&As
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- By S. Brakman, University of Groningen, Netherlands, G. Garita, Erasmus University Rotterdam, Netherlands, H. Garretsen, University of Groningen, Netherlands, C. Van Marrewijk, University of Utrecht, Netherlands
- Edited by Peter A. G. van Bergeijk, Steven Brakman, Rijksuniversiteit Groningen, The Netherlands
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- Book:
- The Gravity Model in International Trade
- Published online:
- 01 June 2011
- Print publication:
- 10 June 2010, pp 296-322
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- Chapter
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Summary
Introduction
Two waves stand out in the history of globalization. The first wave took place in between 1850–1913, and the second wave started after World War Two and continues until this day (see Bordo et al. 2003); moreover, Baldwin (2006) characterizes globalization in terms of two great unbundlings. In his view, during the first wave and much of the second, the fall in transportation costs and the removal of trade barriers spatially unbundled production from consumption, which enabled international specialization. With the second unbundling, the start of which Baldwin (2006) dates at around 1980–90, production itself is increasingly geographically separated; that is, it is no longer the case that production takes place under a single roof. In this light, new technologies enable firms to relocate certain stages of the production process to other countries.
As Figure 11.1 shows, throughout the past fifteen years the growth rate of FDI has surpassed those of both world GDP and world trade. This increased importance of FDI has led to an enthralling and relatively new research agenda that tries to explain the existence of multinational enterprises or MNEs (see for example Markusen 2002; Barba Navaretti and Venables 2004; Helpman 2006; and Brakman and Garretsen 2008). A key feature of these models is the role of trade barriers or, in general, economic distance in determining FDI, since distance-related variables are crucial for understanding FDI patterns.