The Changing Incidence of Geography∗†

The incidence of bilateral trade costs is calculated here using neglected properties of the structural gravity model, disaggregated by commodity and region, and re-aggregated into forms useful for economic geography. For Canada’s provinces, 19922003, sellers’ incidence is on average some five times higher than buyers’ incidence. Sellers’ incidence falls over time due to specialization, despite constant gravity coefficients. This previously unrecognized globalizing force drives big reductions in ‘constructed home bias’, the disproportionate predicted share of local trade; and large but varying gains in real GDP. JEL Classification: F10, F15, R10, R40. ∗The research in this paper was supported by Industry Canada. We thank Mark Brown, Serge Coulombe, John Helliwell and the participants in the Advances in International Trade Workshop at Georgia Tech, the Fall 2008 Midwest Meetings in International Trade, the 2009 Princeton IES Summer Workshop and seminars at Industry Canada and MIT for useful comments. We gratefully acknowledge the very detailed and useful comments of two referees. †Contact information: James E. Anderson, Department of Economics, Boston College, Chestnut Hill, MA 02467, USA; Yoto V. Yotov, Department of Economics, Drexel University, Philadelphia, PA 19104, USA. The large gravity literature has revealed much information about bilateral trade costs (Anderson and van Wincoop, 2004). But the literature has not addressed incidence: the proportions of trade costs paid by sellers and buyers. The omission is important because incidence is what matters for most issues of regional specialization, welfare and policy. For example, even with uniform trade costs, sectors with larger sellers’ incidence will tend to have smaller supply, all else equal. As for welfare and policy, uniform trade cost reductions confer benefits with buyers’ and sellers’ incidence varying across trade partners. Recently discovered properties of structural gravity are used here to calculate sectoral incidence measures of trade costs for Canada’s provinces, 1992-2003. We uncover a secular fall in sellers’ incidence that induces a fall in home bias and a rise in real GDP. This reflects a previously unrecognized force of globalization: specialization acting to reduce the trade cost bill. We add to the gravity literature new methods and new empirical lessons about Canada’s trade costs. Inward and outward multilateral resistance (Anderson and van Wincoop, 2003, 2004) are identified here as buyers’ and sellers’ aggregate (across partners) incidences. We calculate incidence and decompose it into domestic and international components. We account for home bias due to trade costs, directly and through multilateral resistance, in a new Constructed Home Bias (CHB) index, the predicted value of internal trade relative to the theoretical value of internal trade in a frictionless world. Our general equilibrium incidence measures are a natural extension of standard partial equilibrium incidence measures. The latter divide the trade cost of a single shipment into buyers’ and sellers’ margins relative to a hypothetical frictionless price such that the expenditure by the buyer and the net receipt of the seller is preserved. Our method similarly preserves expenditure and net sales at a hypothetical ‘world’ price but aggregated across trade partners. For sellers it is as if each origin pays a uniform-over-destinations trade cost to ship the same value of goods as in the actual equilibrium to a ‘world’ market. For buyA prominent literature has focused on Canada’s trade, drawing wider implications for economic geography from Canada’s physical geography, sharp regional differences and high quality bilateral shipments data.