Distance(s) and the volatility of international trade(s)

Abstract

We show that distance matters for the volatility of international trade and financial transactions on top of its well-known impact for their levels. We conduct event studies on the global financial crisis and the Covid-19 pandemic with country-level and product-level data, and a longer panel data analysis. We consider measures of physical, virtual, and language distance jointly – the latter two proxying for ease of communication. We find evidence of larger trade declines in more distant country dyads and underscore the relevance of information frictions rather than shipment costs. Physical distance matters for trade volatility beyond goods, as do virtual and language distances. Physical and virtual distances amplify each other's effects at the country level, as do virtual and language distances at the product level. Distance effects are also weaker for homogenous products and foreign direct investment and banking activity entailing local presence, again pointing to the importance of information frictions.