Distance still matters

More

VoxEU has an intriguing post by Keith Head, Thierry Mayer and and John Ries, about their work on distance effects in trade in services. Surprisingly, they find some.

Using theory and estimated distance effects, we are able to measure the
extent to which geographic separation insulates local workers from
foreign competition. The calculations reveal that, from the point of
view of a London service purchaser, workers in Oxford can be paid 99%
to 373% more than workers in Bangalore in productivity-adjusted wages
and yet still be more attractive, once service-delivery costs are taken
into account. This is because the Bangalore workers are 100 times more
distant from London than the Oxford workers.



Those results indicate that geographic barriers offer high-wage
workers substantial insulation from low-wage competitors based in
remote countries. Distance has long acted as a serious impediment to
international transactions. Unfortunately, most of what we know about
the effects of distance on international transactions is based on
studies of trade in goods. A consensus appears to be forming that
freight costs cannot explain the strength and functional form of the
distance effect for goods. Instead, physical distance seems to be picking up some combination of
the barriers imposed by cultural differences, the continued desire for
face-to-face communication, and the geographically-biased structure of
social and business networks. These factors apply to services as well
as goods. Thus, there are two senses in which Mankiw is right to say it
does not matter whether imports arrive by ship or by broadband. First,
there will be potential gains from trade in either case. Second, there
will be distance costs that limit the realisation of those gains.



How much should high-wage workers fear competition from much lower
paid workers in India and China? Our findings suggest that distance
still provides significant protection. Since these estimates reflect
averages across a range of services, there are surely services where
competition is especially acute. Moreover, service delivery costs
associated with distance appear to have fallen over the last decade to
a level that is slightly below the level estimated for goods.
Unfortunately, the data do not clearly indicate whether distance costs
for services will continue their downward trend or level off. We
suspect that persistent cultural differences, as well as locally-biased
social networks, will maintain distance costs at a high enough level to
forestall the small, flat world envisioned by some journalistic
accounts.

It makes sense of course that cultural differences and social networks should affect costs in delivering services. What I find a bit more puzzling is that those effects should be significantly correlated with distance. Isn't Britain closer in those dimensions to the United States or Australia, say, than it is to France? Well, maybe not.

Jump to comments
Presented by

Clive Crook is a senior editor of The Atlantic and a columnist for Bloomberg View. He was the Washington columnist for the Financial Times, and before that worked at The Economist for more than 20 years, including 11 years as deputy editor. Crook writes about the intersection of politics and economics. More

Crook writes about the intersection of politics and economics.

Get Today's Top Stories in Your Inbox (preview)

What's the Number One Thing We Could Do to Improve City Life?

A group of journalists, professors, and non-profit leaders predict the future of livable, walkable cities


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.

Video

What Makes a Story Great?

The storytellers behind House of CardsandThis American Life reflect on the creative process.

Video

Tracing Sriracha's Origin to Thailand

Ever wonder how the wildly popular hot sauce got its name? It all started in Si Racha.

Video

Where Confiscated Wildlife Ends Up

A government facility outside of Denver houses more than a million products of the illegal wildlife trade, from tigers and bears to bald eagles.

Video

Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.

Video

The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air

Writers

Up
Down

More in Business

Just In