Who’s Getting Globalized? The Size and Implications of Intranational Trade Costs

February 2014
David Atkin, Dave Donaldson

Howlarge are the barriers that separate consumers in remote locations of developing countries from global markets and what do those barriers imply for the incidence of globalization (i.e. reductions in international barriers)? We develop a new methodology for answering these questions and apply it to newly collected CPI micro-data from Ethiopia and Nigeria (as well as to the USA as a benchmark). In order to overcome three well-known but unresolved challenges that arise when using price gaps to estimate trade costs, we: (i) work exclusively with a sample of goods that are identified at the barcode-level (so as to mitigate concerns about unobserved quality differences over space); (ii) collect novel data on the origin location of each product in our sample (so as to focus only on the pairs of locations that actually identify trade costs); and (iii) demonstrate how estimates of cost pass-through can be used to correct for potentially varying mark-ups over space. Failure to apply these corrections would result (in our data) in estimates of the cost of distance that are too low by a factor of approximately four. Our preferred estimates imply that the cost of trading over unit distance within Ethiopia or Nigeria is four to five times larger than within the US. In a final exercise we use our pass-through estimates to calculate that intermediaries capture themajority of the surplus created when the world price for an imported product falls, and that intermediaries’ share is even higher in remote locations.