A new interpretation of the distance puzzle based on geographic neutrality

One of the most remarkable features of globalization is the fact that advances in technology have contributed to reducing the cost of trade (e.g., transportation and communication costs), and thus boosted international trade. Under these circumstances, the importance of distance should have diminished over time, which would constitute a boon for countries located far from the main centers of economic activity. However, one of the best-established empirical results in international economics is that bilateral trade decreases with distance. This apparent contradiction has been labeled as the “missing globalization puzzle”. We propose yet another explanation to this apparent contradiction based on the concept of geographic neutrality, which we use to construct international trade integration indicators for two different scenarios, namely, when distance matters and when it does not. Our results indicate that the importance of distance varies greatly across countries, as revealed by disparate gaps between distance-corrected and distance-uncorrected trade integration indicators for different countries. Some factors rooted in the literature explain away the discrepancies, but their importance varies according to the trade integration indicator considered—trade openness or trade connection.